LOGISTICS

As the fallout from the current global economic crisis takes its toll on local logistics and distribution operations there is an urgent need for all stakeholders to rid their supply chains of inefficiencies. Andrew Parker reports. 

SO SAYS Marius Swanepoel, Imperial Logistics CEO, in the preface of the fifth annual logistics survey produced by the CSIR and Stellenbosch University. 

“Companies,” Swanepoel says,  “should refrain from using their experiences and gut feelings as a guide when making optimisation decisions and instead engage with professional logistics and supply chain management companies.” 

Imperial Logistics is the principal sponsor of the survey, the aim of which is to provide a comprehensive picture of the state of logistics in South Africa, incorporating a macro-economic view (top-down) and an industry-level perspective (bottom-up). The figures and calculations in the survey are taken from 2007 statistics. 

The survey focuses on internal and external logistics value and cost drivers that influence South Africa’s global competitiveness. After reading the 70 page tome it is quite obvious, as Swanepoel points out, that both manufacturers and logistics service providers need to take a number of steps to deal with the difficult economy. “One of the most important actions companies can take,” he says, “is to ensure that their supply chains are well managed.” 

And how true that statement is. Most of the foibles and shortcomings in the road transport industry can be traced back to poor or inadequate management. 

While road transport, as an industry, suffers from a score of bad habits as the survey reveals, it is not all bad news. Hans Ittmann, from the CSIR Built Environment research division, points out the South African logistics industry is performing very well, given the environment it has to operate within. 

He adds, however, that it will be increasingly difficult to maintain these levels of service. “History shows that circumstances will improve,” he says, “and it is critical companies put time and effort into redesigning and improving their supply chains to prepare for the upswing.” 

Ittmann points out Logistics costs are one of the critical factors affecting the progress and development of logistics and distribution in South Africa. “Because of the high and increasing internal logistics costs, South Africa’s position on the World Bank logistics competitiveness report will most probably deteriorate,” he warns. 

Transport remains the biggest contributor to logistics costs and thus the biggest challenge in South Africa’s logistics system. Logistics costs for 2007 amounted to R317 billion or 15,9% of GDP, up by 1% from 2006. 

To get an idea of how cost increases affect the total distribution chain, the survey points out that inventory carrying costs doubled over the last four years while transport costs grew by more than 50% during the same period. 

Little wonder, Ittmann says, South Africa’s current logistics configuration leads to unacceptable risk exposure to global upheaval.

One of the contributors to increased inventory costs are the long transport distances in South Africa, which not only lead to high transport costs, but also add the cost of time due to delayed inventory. 

The real interaction between inefficient transport and inventory delay is complex, as a direct relationship also exists between actual storage time and the delay in inventory as logisticians attempt to circumvent transport challenges. 

Unlike most other industrial processes, transport is directly dependent on a risky and unpredictable core cost driver, namely the price of fuel. In ‘normal’ strategic procurement terms this input would be managed carefully and with clear strategies in mind. Often, in South Africa, this is not the case on a company, industry, infrastructure or regulatory level. That is why transport costs, as a percentage of GDP, can be expected to be erratic and exposed to global risks. This is borne out when looking at the cost of fuel, from January 1 to December 31, 2007 during which the price of diesel increased by 32%. 

In total, 29% of transport and 15% of South Africa’s logistics costs are exposed to direct external factors (given the current configuration) and cannot be controlled by logisticians. Many other ‘hidden’ aspects are also outside the sphere of control, such as the additional cost burden on operations that are caused by ailing infrastructure. Furthermore, externalities that are not accounted for (such as congestion, accidents, pollution) add aspects that cannot be controlled directly on a firm level. 

Whereas logisticians continually attempt better practices, the current modal configuration, infrastructure condition and lack of management information pose a total system risk. 

The core drivers of logistics costs are currently the price of imported fuel and the interest rate. Strategic procurement practices suggest, at minimum, that more transport output should be generated with local input. This could be achieved only by higher local fuel production or a switch of transport supply to a locally-generated power source such as rail. This switch can be enabled only by intermodal services being provided by road and rail operators in South Africa.

Companies need to put time and effort into redesigning and improving their supply chains for the upswing Marius Swanepoel CEO, Imperial Logistics

Land freight

In 2007 close to 1,6 billion tons of freight was moved by land, sea and air in South Africa. Almost 1,4 billion tons was transported by road at an average transport distance of 178 km, delivering 245 billion ton/km. 

Rail contributed 205 million tons at an average transport distance of 629 km, delivering 129 billion ton/km. 

The market share split for road and rail by tons transported thus stands at 87/13. According to the survey, this is an unsustainable situation and a viable domestic intermodal solution that will reduce risk and lower costs is a much needed necessity. 

Industry headaches

Interestingly enough, the top five transportation headaches identified in a report by the American Association of State Highway and Transportation Officials, mirror those identified in the CSIR’s survey. They are:

• Ageing bridges and crumbling roads.

• Congested roads, highways and transit systems. 

• Traffic fatalities and injuries. 

• Demand stressing the system. 

• Rising costs for all stakeholders.

The benefits derived from addressing these are huge for South Africa. Improvements to the infrastructure creates jobs and boosts economic growth while the longterm benefits, such as improving the country’s logistics competiveness far outweigh the costs. 

The value of logistics

Logistics is not merely about achieving the lowest transport or storage costs, but it is about finding the lowest overall costs for the operation. Understanding that the state of logistics should be measured in terms of consumer satisfaction and the total effectiveness of the value chain, provides valuable guidance to logisticians and supply chain professionals. 

Skills

Surviving and thriving in the logistics and supply chain management industry in and beyond 2009 will require skilled and experienced practitioners who recognise the dangers and who are able to spot the opportunities and turn them into profitable business. 

With this in mind the spotlight falls on three aspects: fuel, skills development (people) and collaboration (the key to controlling and optimising logistics costs). Increases in fuel prices exert positive pressure on supply chain professionals to review collaboration with logistics service providers (LSPs) and to find intelligent solutions, decreasing the high demand for transportation and reducing logistics costs. 

It is vitally important for South Africa to increase investment in tertiary education and skills development to improve the country’s competitiveness in the global logistics market. Partnerships with LSPs mean that companies can focus on doing what they do best, but some elements of control could be lost and it is therefore important to work closely with LSPs to ensure the right level of detail and cultural fit are achieved. LSPs are provided with opportunities to upgrade their capabilities, offer value-added services through a collaborative approach to improve performance, efficiency and effectiveness. 

Uncertainty 

South Africa is in serious trouble as far as the labour production factor is concerned and programmes to address labour and training issues have been less than successful. In order to understand this situation better, current productivity should be researched and future needs analysed. 

Future solutions for South Africa’s surface freight transport skills problems will have to consider a return to rail. This means highly technical skills development in an area where the country is already behind. 

Infrastructure 

The potential effects that worsening road conditions can have on the broader economy are increases in vehicle damage, damage to transported cargo, environmental damage and increases in congestion and a decrease in safety. Ultimately total operating costs increase exponentially. A limited case study indicated that trucks travelling on roads with average and bad riding conditions experienced an increase in costs of between 684% and 1 560%, respectively. 

Future outlook

Forecasts indicate that freight transport demand will grow by between 200% and 250% over the next 20 years. Some corridors, such as the corridors between Gauteng, Johannesburg and Cape Town (which amount to 50% of all corridor transport) will densify even faster than this.

Even in a low-growth scenario the challenges of alleviating congestion in metropoles, providing cheap corridor transport and developing rural infrastructure cannot be met with the current configuration. Freight transport by road over long distances is too expensive and it is clear that a shift from freight transport by road back to rail could solve some of the high cost-related problems and provide opportunities for a more competitive position for South Africa as a whole. 

Long distance truck travel also contributes to socio-economic problems within the driver population as is evidenced by the prevalence of HIV&AIDS and other social issues among truck drivers. The road freight transport subsector acknowledges in discussions that future adherence to SHEQ (safety, health, environment and quality) standards and RTQS (road transport quality standards) will put more pressure on the subsector in terms of driver education and working conditions. 

The above-mentioned shift will require that the industry’s sector skills plan (based on skills shortages and training needs identified by the Transport Education and Training Authority through analyses and aggregation of company workplace skills plans) will have to be aligned closely with a number of national plans to support a skills demand shift from long-haul road to long-haul rail. 

As market demand grows and even where different skills will be required because of a supply side shift in modality, it is still relatively easy to re-skill elementary, service and administrative employees. It’s more difficult to re-skill operational, professional and senior management employees. Within this group, operational is the most critical problem as the current levels of skills are very low and the degree of shift expected very high. 

In South Africa a large gap is opening up between the demand and supply for technical/operational skills for all industries in general. In some cases, however, industries change because of external factors and sudden demands for some skills will grow exponentially (not merely in line with GDP) and significant shortages could be expected. This industry is in such a position and strategic planning is required to address the situation.